Financial Position

At €2,376 million, operating cash flows remained at the previous year’s level (previous year: €2,361 million). A decrease in cash tied up in working capital stood in contrast to a decline in EBITDA and increased income tax payments. Due to increased cash outflows for additions to property, plant, equipment and intangible assets, free operating cash flow decreased to €1,669 million (previous year: €1,843 million).

Capital expenditures in 2018 were targeted at plant maintenance and improvement, as well as especially in new capacities for the three segments. The strategically relevant capital expenditures in property, plant and equipment pertained to the expansion of MDI capacities in Brunsbüttel, Germany, and Tarragona, Spain, at Polyurethanes; the expansion of capacities at the site in Shanghai, China, at Polycarbonates; and the expansion of global production capacities for Specialty Films at Coatings, Adhesives, Specialties.

Net cash outflow for investing activities in 2018 totaled €346 million (previous year: €747 million). Cash outflows for additions to property, plant, equipment and intangible assets of €707 million (previous year: €518 million) stood in contrast to net cash provided by current financial assets.

Net cash outflow for the Covestro Group’s financing activities in 2018 amounted to €2,402 million (previous year: €634 million). The cash outflows mainly relate to the acquisition of treasury shares in the amount of €1,313 million, the redemption of the first tranche of the bond program totaling €500 million and Covestro AG’s dividend distribution of €436 million.

Net financial debt increased by €65 million in fiscal 2018 to €348 million (previous year: €283 million). The net cash used in the aforementioned investing and financing activities exceeded the cash flow from operating activities and therefore reduced total cash and equivalents.

Financial management

The main purpose of financial management is to ensure solvency at all times, continuously optimize capital costs and reduce the risks of financing measures. Financial management for the Covestro Group is performed centrally by Covestro AG.

Covestro AG currently holds a Baa1 investment-grade rating with a stable outlook from the rating agency Moody’s Investors Service, London (United Kingdom).

Covestro AG operates a Debt Issuance Program as a framework with a total volume of €5,000 million facilitate obtaining flexible financing from the capital market. The company is thus in the position to issue fixed- and variable-rate bonds as well as to undertake private placements.

Under the program, Covestro AG successfully placed three bonds with a total volume of €1,500 million on March 3, 2016. The bonds comprise two fixed-rate tranches with terms until October 2021 (a coupon of 1.00% and a volume of €500 million) and September 2024 (a coupon of 1.75% and a volume of €500 million). A variable-rate tranche with a volume of €500 million and a coupon of 0.60 percentage points above the three-month Euribor was redeemed in March 2018 as planned. The outstanding bonds are valued at Baa1 by Moody’s Investors Service.

The liquidity acquired in this way is intended to be used for general financing needs. Covestro AG agreed a syndicated revolving credit facility with a banking consortium totaling €1,500 million with a term until September 2022. No loans had been drawn against this syndicated credit facility as of December 31, 2018.

The Covestro Group pursues a prudent debt management strategy to ensure flexibility, drawing on a balanced financing portfolio. This portfolio will be based for the most part on bonds, syndicated credit facilities and bilateral loan agreements.

As a company with international operations, Covestro is exposed to financial opportunities and risks. These are continuously monitored within the context of Covestro’s financial management activities. Derivative financial instruments are used to minimize risks.

Please see section “Opportunities and Risks Report” for further details of financial opportunities and risks.